A qualified (i.e., under the tax code), defined employee contribution, designed to invest primarily in the stock of the sponsoring employer. It is company stock owned by the employees, often given as a bonus or other incentive rather than being purchased by the workers. In many cases, the employee shares are held in a trust rather than being given to the employees or being paid annually. When the employee retires or resigns, the company purchases the employee’s stock shares. In this way, an ESOP can act as a retirement savings plan.
Employee stock ownership plans first came into widespread use in the mid-1970s, and they have two main benefits for companies. First, they create common interests between employees and shareholders. If employees work harder or smarter in ways that benefit the company (and the shareholders), they personally benefit as well. Second, the company and the employees typically receive certain tax breaks for participating.
When a company advertises itself as “employee-owned,” it is usually referring to some form of employee stock ownership plan.